Mixed signals

The long-awaited semiconductor and chip-equipment recovery is finally here, that is, based on market data from leading research houses over the last week.

Or is it? Some researchers see a few more speed bumps ahead, as fab utilization fell below analysts' expectations in the third quarter of 2003. And semiconductor inventories remain low in the channels, as some OEMs are pushing out their restocking cycles.

Indeed, there are some mixed signals in the marketplace. For example, despite an apparent upturn in the semiconductor industry, worldwide fab utilization for MOS devices fell short of analysts' expectations for the third quarter of 2003.

Worldwide fab utilization for MOS devices reached 88.7 percent in the third quarter, up from 86.4% in the prior quarter, according to the Semiconductor International Capacity Statistics (SICAS) report.

Analysts were disappointed, however. "We were expecting 90.8 percent," said Cristina Osmena, an analyst with Needham & Co. in New York, in a report issued this week. "Total MOS capacity in the September quarter increased 5 percent over the June quarter vs. our estimate of flat," Osmena said.

"The tightening of capacity is directionally better, but the rate of improvement is proceeding at a slower pace than expected," she said. "The 5 percent increase in capacity is particularly interesting, given that semiconductor equipment revenues have not yet ticked up substantially."

There are other factors. "It speaks to the improvement in capital efficiency, an improvement which was also apparent at the Intel analyst day. Intel expects to reduce silicon costs by a total of 50 percent in 2003+2004, a function of more efficient use of capital."

Meanwhile, leading-edge processes remained tight for the period, according to the SICAS report. Overall fab-utilization was 89 percent for the third quarter, with leading-edge 130-nm processes running at 95 percent, according to the SICAS report.

Just in time

At the same time, chip inventories dropped in the third quarter of 2003, indicating that OEMs have pushed out their "restocking" plans until the beginning of next year, according to a report from SG Cowen Securities Corp. this week.

The inventory "restocking" delays, coupled with continued chip demand in the marketplace, has prompted SG Cowen to alter its IC forecast. SG Cowen believes that the semiconductor market will grow 14 percent in 2003 over 2002. That represents the high side of its original forecast. Previously, SG Cowen projected that the IC industry would grow from 10-to-14 percent in 2003 over 2002.

But still, there are some puzzling trends in the channels. "Our most recent study indicates that inventory levels declined slightly again in the September quarter," according to SG Cowen. "Inventory as a percentage of sales for a basket of large OEMs that we track fell slightly, from 8.4 percent to 8.3 percent of sales--another 20-year low."

This is not to say that the IC and end-user markets are weak. "Our IT industry forecast is for continued modest improvement in demand, and as a result, we believe that an inventory rebuilt could occur in early 2004," according to the New York-based investment banking firm. One of the reasons for the "restocking" delay is the shift towards just-in-time manufacturing schemes, according to the report.

Positive forecasts

There is still plenty of good news out there, however. The ongoing order uptick has prompted VLSI Research Inc. to raise its chip-equipment forecast for 2003 and 2004. But in a report issued this week, the research firm did not change its worldwide semiconductor forecast despite an upswing in the book-to-bill ratio.

Last month, VLSI Research projected that the chip-equipment industry would grow 1.8 percent in 2003 and 18 percent in 2004. Now, the Santa Clara-based research firm projects that the business will reach $31 billion in 2003, up 4.2 percent over 2002. In 2004, the market will hit $37.6 billion, up 21.3 percent over 2003, according to VLSI Research.

At the same time, the worldwide semiconductor equipment book-to-bill ratio reached 1.03 in October of 2003, which is flat from September, according to VLSI Research. Bookings were $2.700 billion in October, while billings were at $2.630 billion.

"While these figures are below the September levels, they mark the first time this year that the B:B ratio remained above parity for a second time in a row," according to the firm. Of the billings, $1.374 billion were for wafer processing equipment, $646 million for test and related equipment, $270 million for assembly, and $340 million for service and spares.

VLSI Research did not change its chip forecast, which calls for 13.9 percent growth in 2003 and 21.3 percent in 2004. However, the book-to-bill ratio for ICs was at 1.15 in October, up from 1.11 in September.

The three-month worldwide bookings average hit $14.5 billion for the month, while billings amounted to $12.6 billion. IC billings represent the average of WSTS sales data for August, September and VLSI Research's estimate for October.

Front-end capacity utilization reached the 92 percent mark in October. "This time the high utilization rates were experienced not just at 180nm and below, but also at the trailing edge nodes. This indicates that the industry is running out of capacity, which may lead to severe shortages, given demand continue to increase at current rates," according to VLSI Research.

"Driven by chip prices that have been on the rise all year, strained capacity and chip makers emerging into profitability, optimism has returned to the equipment industry," according to the report. "Order activity has intensified once again, improving from single to multiple units. Bookings for back-end equipment remain robust, with most announcements coming from Asia. Orders for front-end equipment are also gaining traction. Order activity is past the 'tire kicking' stage, as customers come looking with real budgets," the report said.

"Funds are getting released, plus there is a definite trend for chip makers to announce increases in capital spending plans," according to VLSI Research.

Book or bill?

In fact, North American-based manufacturers of semiconductor equipment posted a book-to-bill ratio of 1.00 in October, up from 0.96 in September, according to the Semiconductor Equipment and Materials International (SEMI) trade group this week.

A book-to-bill ratio of 1.00 means that the value of new orders equals the value of product billed for the period. The SEMI book-to-bill is a ratio of three-month moving average bookings to three-month moving average billings for the North American semiconductor equipment industry.

The three-month average of worldwide bookings was $871.1 million in October, up 12 percent from the revised September 2003 level of $778.8 million and 12 percent above the $775 million in orders posted in October 2002.

The three-month average of worldwide billings in October 2003 was $873.4 million. The billings figure is 8 percent above the revised September 2003 level of $811 million and 13 percent below the October 2002 billings level of $1 billion.

"This the first time since August 2002 that the ratio of bookings and billings has reached parity. The October data is a welcome confirmation of improving industry conditions," said Stanley Myers, president and CEO of SEMI. "While the industry must still contend with a challenging economic environment, there is increasing evidence that a recovery is mounting for the semiconductor equipment market."

It's a fab, fab, fab world

And next year looks positive. Capital spending in the semiconductor industry is expected to jump 48 percent in 2004 over 2003, according to a report from IC Insights Inc.

That's nearly five times greater than the figure in 2003. This year, capital spending is expected to reach $29.615 billion, up 10 percent over 2002, according to the Scottsdale-based research firm.

"Overall, IC Insights believes that the 2004 semiconductor industry capital spending increase will be at least twice the growth rate exhibited by the total semiconductor market," according to a report from the research firm.

"Recent comments from some large semiconductor vendors are beginning to support IC Insights 2004 capital spending forecast," the report said. "For example, ST (STMicroelectronics Inc.) is planning to increase its capital spending by 33 percent in 2004, while Infineon plans to boost its capital spending by up to 60 percent," the report said.

Taiwan's foundry giants--Taiwan Semiconductor Manufacturing Co. Ltd. and United Microelectronics Corp.--have separately indicated that their respective capital spending budgets could double in 2004, according to the report.

In fact, there are 25 wafer fabs online that can process wafers of 300-mm diameter and when ramped to full production they would have an aggregate manufacturing capacity of 400,000 wafer starts per month, according to a report from market research company Strategic Marketing Associates (SMA).

The report lists United Microelectronics Corp., a leading foundry based in Taiwan, as having more potential 300-mm capacity than any other company. Intel, Samsung, Powerchip and Texas Instruments, follow UMC in the rankings.

Taiwan is the leading country in 300mm capacity, followed by the United States and these two countries control 55 percent of the 300-mm wafer processing capacity that has come online so far.

Most of the 300-mm lines commissioned so far are devoted to DRAM production, followed by foundries. These two categories account for more than two-thirds of current 300mm capacity, with Taiwanese fabs accounting for 40 percent of the 300-mm fabs that are under construction or in the process of equipping, as well as those in the planning stage, said SMA.

And the total value of wafer fabs under construction or being equipped is more than $27 billion. "Most of the fabs being built today are 300-mm. We're definitely in a 300-mm world," said George Burns, SMA president, in a statement.

"We expect even stronger new fab activity in 2004 as DRAM companies maintain their 300-mm momentum and foundries begin to fill in empty spaces left from bringing new fabs on line at the beginning of the last downturn. We're in an upturn and 300-mm will drive it."

The 300-mm fab report lists 18 300-mm fabs in the planning process, including two upgrades from the 200-mm wafer size. The total value of these planned fabs is $34 billion.